Using a panel dataset on 103 developing countries, this paper empirically analyzes the impact of the European aid flows on quality of governance in aid recipient countries. The analysis employs aggregated Official Development Data as well as disaggregated project level data. The results show that while bilateral aid from the largest European donors does not show any impact, multilateral financial assistance from the EU Institutions leads to an improvement in governance indicators. These findings thus suggest that European development assistance can help to promote good governance if aid is allocated at the EU supranational level rather than at the national level of the member states.